NEW YORK CITY-As the city continues to emerge from the recession, and the effects of superstorm Sandy, the commercial real estate picture is likely to be a mixed bag in 2013—much as it was last year—according to the fourth quarter report from Colliers International, which was discussed Monday during a press briefing.
The final months of 2012 saw indicators of impressive strength come from pockets of the city, while others saw only small growth or even declines and some office space sectors traded places in terms of their ranking when it comes to their performance levels.
“New York became famous because it had an industrial foundation, and I believe it’s going back to that, albeit a new type of industrial foundation,” said Peter Kozel, Colliers’ chief economist, tri-state, said during the press event.
Since the early 2000s, growth in the technology sector has been “spectacular,” he said, and he expects continued signs of vibrancy from that engine of the city’s success. “Technology isn’t a bubble, it’s a permanent part of the economy.”
On the other hand, the usually solid finance sector has been lagging due to lackluster employment growth while the business services (such as accounting and consulting) segment has replaced law firms as the second largest category of office leasing, according to Kozel.
In other words, commercial real estate upticks—or fall-offs—are very sector driven. “It’s critical to see which sectors are experiencing growth and how much office space they’ll use,” he said.
In at least one area of the city, space usage is high, said Joseph Harbert, president, eastern region. “Midtown South is on fire,” he said. According to Colliers’ research, Midtown South’s already tight vacancy rate declined to 3.9% in the fourth quarter, down from 4% in the third quarter and 4.5% year-over-year.
The overall average asking rent increased to $47.36 per square foot but that somewhat softened figure is heavily influenced by activity in class C and lesser quality class B properties, the research report notes.
The most sought after quality class B and class A buildings in Midtown South now often command rents above $70 per-square-foot, the report states. “People want to be there; owners are getting over 90% of what they’re asking for,” said Harbert. “That number was up to 94% in 2007,” he told GlobeSt.com, “but 90.8% is clearly a high number and indicates tight pricing.”
The squeeze in Midtown South is forcing tenants to consider portions of the area that they wouldn’t have looked at before, he noted. “People are starting to look at pockets of Midtown south that they wouldn’t have considered before, like NoMad, and people are creeping up north to the Garment District.”
That popularity has led brokers to work on marketing property which isn’t even available, noted Michael Cohen, president, tri-state region. “We’re marketing space two or three years ahead” of when it will come online.
In Midtown North, leasing activity in Q4 was “solid,” according to Colliers’ research, at slightly less than 3 million square feet. However, both Columbus Circle and Plaza District submarkets saw significant availability rate increases for class A space. The average asking rent declined to $66.66 per square foot, down from $67.28 in the third quarter and $68.58 per square foot in the second quarter.
Meanwhile, leasing activity in the Downtown area was depressed in the fourth quarter at 829,000 square feet, with 31% of that activity being in subleasing, the report says.
Some major buildings Downtown were closed for part of the fourth quarter as a result of Sandy, an impact that could linger into 2013. In the World Trade Center submarket, both class A and class B average asking rents—at $52.54 per square foot and $32.77 per square foot, respectively—were nearly unchanged from the third quarter.
The other major submarkets also saw little movement in asking rents. The Class A availability rate declined to 17.5 percent, down from 18.7 percent in the third quarter, but it is especially high in the World Trade Center submarket, at 23.8 percent. However, the report notes, the space in the World Trade Center submarket is “some of the most modern and efficient buildings in Manhattan, which should be a strong draw for new tenants.”
Indeed, that likely comes as no surprise to Howard Grufferman, vice chairman, New York office. “Efficiency and the ability to create an identity going forward is going to be more of a driver for companies than rent,” he said.